Canadian companies at capacity, yet still cautious on investment

Shift toward risk aversion, away from growth: Economist

By
Leah Schnurr

Jun 01, 2016

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OTTAWA (Reuters) — Even with some parts of the Canadian economy operating near capacity, economists say business investment is unlikely to pick up soon because many companies are wary about the outlook for growth.

Canadian business investment fell again in the first quarter, gross domestic product data released on Tuesday showed, the fifth straight quarterly decline, which weighed on economic growth.

The business investment decline, heavily influenced by the oil price slump, contributed toCanada's slip into a mild recession last year. Stronger business investment, along with a pick up in exports, is key to the central bank's outlook.

Weak global and Canadian growth expectations mean businesses do not need to invest as much in expanding their operations as they might have otherwise, said Eric Lascelles, chief economist at RBC Global Asset Management.

Additionally, there has been a shift toward risk aversion and away from investing for growth, he said.

"Sometimes that means leaving something on the table in terms of growth opportunities and I think that is still very much central to business decision making around the world right now," Lascelles said.

The Bank of Canada said in April it expects business fixed investment will take 0.8 percentage points off economic growth this year before contributing modestly in 2017. It more recently noted investment and intentions remain disappointing.

Lascelles expects the bank may have to lower that forecast, possibly in its next monetary policy report in July.

The bank had highlighted that some sectors, such as wood products and transportation equipment, are operating at capacity utilization rates that are close to historical highs, suggesting they will need to invest in factories and equipment as demand increases.

But companies may wait to see that the demand is there first, given the risk that the U.S. economy does not rebound from a weak first quarter as strongly as anticipated.

That means any bump up in spending in the near-term may be modest, if it comes at all.

"Autos are running flat out and the problem with that is it doesn't look as though there's any more investment coming on that front," said Benjamin Reitzes, senior economist at BMO Capital Markets, pointing to a fourth-quarter capacity utilization rate of 97.8 percent for the transportation sector.

"That high number does not portend new investment, unfortunately."

While there may be some bright spots outside the energy sector, the drag from the commodity slump is going to be a bigger weight on overall business investment, said Bill Adams, senior international economist for PNC Financial Services Group.